LONDON: The dollar edged towards a one-week high on Thursday as the trade tensions between China and the United States prompted investors to seek shelter in the greenback.
While U.S. money markets are pricing in roughly two rate hikes by January 2020 and the bond yield curve inverted further overnight, signalling rising recessionary risks for the world's biggest economy, demand for dollars show no signs of abating.
"The strength in the dollar is surprising given that markets are now expecting multiple rate cuts by 2020," Commerzbank FX strategist Ulrich Leuchtmann said.
Against a basket of its rivals, the dollar was generally firm at 98.22, with gains more pronounced against rivals such as the euro and the pound. It was on track to rise for a fourth consecutive month.
Risk appetite was broadly cautious despite some early gains in European stocks, with bond yields firmly entrenched in recession warning territory.
A senior Chinese diplomat said on Thursday provoking trade disputes was "naked economic terrorism", ramping up the rhetoric against the United States amid a bitter trade war shows no signs of ending soon.
The spread between three month U.S. Treasury bills and 10-year bond yields has inverted to its lowest level since August 2017. An inverted yield curve is traditionally seen as a harbinger of recession by financial markets.
Elsewhere in the foreign exchange market, the dollar was steady at 109.59 yen, about 0.5% above a more than three-month low of 109.02 yen touched on May 13.
Analysts said the yen, another safe-haven asset backed by Japan's status as the world's biggest creditor nation, remained relatively weak due to domestic investors' demand for dollars.
"As there's persistent yen-selling and dollar-buying from Japanese investors when the rate approaches the 109.10 yen per dollar level, it's not easy for the yen to rise above the 109 level," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.
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